Segment Information

The Company operates in two reportable segments. The Kratos Government Solutions (“KGS”) reportable segment is comprised of an aggregation of KGS operating segments, including the microwave electronic products, satellite communications, modular systems and defense and rocket support services operating segments. The Unmanned Systems (“US”) reportable segment consists of its unmanned aerial system and unmanned ground and seaborne system businesses. The KGS and US segments provide products, solutions and services for mission critical national security programs. KGS and US customers primarily include national security related agencies, the U.S. Department of Defense (the “DoD”), intelligence agencies and classified agencies, and to a lesser degree, international government agencies and domestic and international commercial customers.

As discussed in “Discontinued Operations” in Note 3, on June 11, 2018, the Company completed the sale of its PSS business unit which had previously been reported as a separate reportable business segment. Accordingly, PSS and its subsidiaries have been reported in discontinued operations in the accompanying condensed consolidated financial statements for all periods presented.

The Company organizes its reportable segments based on the nature of the products, solutions and services offered. Transactions between segments are generally negotiated and accounted for under terms and conditions similar to other government and commercial contracts. This presentation is consistent with the Company’s operating structure. In the following table, total operating income (loss) from continuing operations of the reportable business segments is reconciled to the corresponding consolidated amount. The reconciling item “unallocated corporate expense, net” includes costs for certain stock-based compensation programs (including stock-based compensation costs for stock options, employee stock purchase plan and restricted stock units), the effects of items not considered part of management’s evaluation of segment operating performance, merger, acquisition and restructuring expenses, and other corporate costs not allocated to the segments, and other miscellaneous corporate activities.

Revenues, depreciation and amortization, and operating income generated by the Company’s reportable segments for the three and nine month periods ended September 30, 2018 and October 1, 2017 are as follows (in millions):



	Three Months Ended						Nine Months Ended
	September 30, 2018			October 1, 2017			September 30, 2018			October 1, 2017
Revenues:
Kratos Government Solutions
Service revenues	$	54.9		$	47.6		$	147.9		$	150.6
Product sales	71.2			67.9			209.0			207.0
Total Kratos Government Solutions	126.1			115.5			356.9			357.6
Unmanned Systems product sales	33.3			41.6			96.7			79.4
Total revenues	$	159.4		$	157.1		$	453.6		$	437.0
Depreciation & amortization:
Kratos Government Solutions	$	3.3		$	3.5		$	10.2		$	10.8
Unmanned Systems	1.1			2.4			3.4			6.0
Total depreciation and amortization	$	4.4		$	5.9		$	13.6		$	16.8
Operating income from continuing operations:
Kratos Government Solutions	$	11.0		$	1.4		$	23.9		$	15.7
Unmanned Systems	1.0			1.5			3.8			(5.4		)
Unallocated corporate expense, net	(1.9		)	(2.8		)	(8.0		)	(7.3		)
Operating income from continuing operations	$	10.1		$	0.1		$	19.7		$	3.0

Included in the corporate operating income from continuing operations for the nine months ended September 30, 2018 is $2.3 million and $0.5 million of costs related to a pending legal settlement and associated legal costs, respectively, for a matter involving a former employee that was part of an acquisition of a legacy government services company in 2006.